2022Q4 Earnings Review Part VIII: Basic Materials, Consumer Cyclical, Healthcare, Real Estate Investment Trust (REIT)
- Home Depot reported a mixed quarter as management gave a cautious FY2023.
- Medtronic Plc beat on the top and bottom line as management upped its fourth-quarter FY23 guidance.
- Realty Income Corporation reported an impressive FFO and revenue beat as management made some good bolt-on acquisitions.
- Univar Solutions reported a disappointing quarter as they missed earnings and revenue, management needs to get things in order.
- Medical Properties Trust reported an operating loss but beat on revenue as the company reshuffles its property portfolio.
The Home Depot, Inc.(HD): The home improvement retail company reported an earnings beat but missed revenue as foot traffic into the stores decreased. The company reported earnings per share of $3.30 (beat WallStreet estimates by $0.02) on revenue of $35.83 billion (missed WallStreet estimates by $170 million). The company’s earnings came in well below our fund estimates of $3.35/share for earnings on revenue of $36.2 billion. Home Depot reported flat revenue modestly up 0.3% as same-store sales declined 0.3%. The company was able to make the revenue number thanks to a higher average ticket price up 5.8% as transactions declined 6% during the quarter.
Gross margins were expanded by the margin as they rose 7 basis points to 33.28% while operating margins contracted from 13.51% to 13.26% on higher G&A expenses. Net income ended the quarter at $3.36 billion up 0.3% from the same period a year ago. Management announced a billion-dollar investment into its labor force as they look to retain its labor. It's better to keep your labor rather than train new people which costs much more and success is not guaranteed. The expense will be recognized in Q1 2023 in which they gave a wide-ranging outlook. Management raised its dividend by 10% to $2.09/share something which investors will welcome and shows the strength of the company’s cash flows. Home Depot generated $11.5 billion down from $14 billion and ended the year with $2.76 billion in cash.
The stock sold off on the earnings as investors had high expectations for FY2023. Home Depot is a fairly new position for us and we have not filled up our stock allocation we will be taking the sell-off as an opportunity to average the cost down of our stock position.
Medtronic Plc (MDT): The medical device company reported an earnings and revenue beat as the company looks to close out FY2023 on a strong note. Medtronic reported earnings per share of $1.30 (beat WallStreet estimates by $0.03) on revenue of $7.7 billion (beat WallStreet estimates by $170 million). Our fund estimates express our low expectations from the company this year and the company’s headline numbers easily beat our estimates. We estimated Medtronic would earn $1.24/share on $7.48 billion of revenue as we have marked FY2023 as the trough year for the company. Medtronic reported flat revenue primarily helped by 4.1% organic revenue coming from the company’s Cardiovascular & Diabetes products. The good organic revenue helped to offset the $367 million erosion due to the strong U.S. dollar. Management reported COVID-19 shutdowns in China were unfavorable for Medtronic’s supply chain and business.
Medtronic’s margins contracted from the same period last year as management navigates this challenging quarter. Operating margins came in at 18.1% down from 21.4% while net margins declined from 19.1% to 15.9%. Medtronic generated $2.5 billion in free cash flow down from $4.3 billion as they ended the quarter with $4.52 billion on the balance sheet. Management upped its outlook for FY2023 Q4 on the EPS side hinting at cost discipline and organic revenue between 4.5% and 5%. This was a modest beat from the company and the Q4 outlook is a bright spot that the stock might be turning the corner. We think the company trades at a reasonable valuation of 16x earnings with a dividend yield of 3.2% (as of February 22, 2023, on Seeking Alpha) and we would like to add to our stock position.
Realty Income Corporation (O): The real estate investment trust that specializes in single-tenant commercial properties reported strong earnings beat to close out FY2022. The company reported funds from operations (FFO) per share of $1 (beat WallStreet estimates by $0.01) on revenue of $888.7 million (beat WallStreet estimates by $48 million). Realty Income reported impressive headline numbers which show the strength of the portfolio of properties. The company reported revenue growth of 29.7% which propelled normalized funds from operations to grow by 18%. The company completed the acquisition of Encore Harbor Resort & Casino assets from Wynn Resorts for $1.7 billion.
The company invested $387.9 million in Europe as the company looks to broaden its real estate portfolio. During the quarter, Realty Income Corporation raised $2.95 billion in liquidity for its war chest. The company’s dividends paid were up 4.7% as the company continues to be a good steward of capital to shareholders. The company ended the quarter with funds from operations of $664.5 million up from $326.2 million in FY2021. Management gave an upbeat 2023 outlook as the company looks to invest in farmland with Plenty. Overall, the company continues to deliver for investors and we would like to add to our position.
Univar Solutions Inc. (UNVR): The chemical distributor with global exposure disappointed investors as they missed earnings and revenue. Univar Solutions reported earnings per share of $0.44 (missed WallStreet estimates by $0.09) on revenue of $2.6 billion (missed WallStreet estimates by $110 million). The headline numbers from Univar were very disappointing and management blame it on the lower demand from excess inventories. We estimated the company would earn $0.57/share on revenue of $2.72 billion as we thought the China reopening would give a revenue boost. Univar Solutions reported revenue growth of 3.8% as gross profit contracted by 2.2% to 23.1%.
The company’s net income was down significantly from $156.8 million to $71.6 million. Net cash from operating activities was $375.6 million up from $175.2 million as less money was tied up in inventory. Univar generated $325.5 million in free cash flow up from $133.2 million as they ended the quarter with $385 million in cash. The stock reacted down 2% after the report came out and the stock has struggled in 2023 since the M&A interest ended. Management hinted at cost discipline from its FY 2023 guidance net income of between $385–436 million. We think the stock is in a wait-and-see mode given the stock’s run-up in 2022 and we would not oppose some selling at these levels. We will be holding the stock because we think it has the momentum to reach $40/share (an upside of 16.5% from the closing price as per Google Finance).
Medical Properties Trust Inc. (MPW): The healthcare real estate investment trust reported a disappointing quarter as the company reported a loss. Medical Properties reported a loss of $0.24/share (missed WallStreet estimates by $0.51) on revenue of $380.5 million (beat WallStreet estimates by $7.5 million). The loss was a result of a $283 million real estate impairment charge along with lost revenue from the property. The company made some expansion moves as the company bought behavioral health facilities for £233 million and $22 million on a development project in South Carolina. The company ended the quarter with an operating loss of $140 million compared to a $207 million operating profit.
Medical Properties’ asset base is still good at $19.66 billion but is down from $20.52 billion. Management expects FY2023 to be a bounce-back year for the company as they expect EPS to be between $0.83 and $0.98. The company is working through some headwinds and the stock has a high yield of 9.51% and the dividend might need to be cut. A dividend cut will ease up capital to shore up the balance sheet. The stock is still in the penalty box down close to 9% after the earnings news. The stock is a solid hold in our portfolio and we think the company is a turnaround story. The company has net tangible assets of $8.59 billion but the stock has a market capitalization of $6.31 billion which shows a dislocation in the value.
Disclosure: Cresco Investments is long The Home Depot Inc. (HD), Medtronic Plc (MDT), Realty Income Corporation (O), Univar Solutions Inc. (UNVR), and Medical Properties Trust, Inc. (MPW).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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